Income-tax Appellate Tribunal - C Bench Mumbai,Before SShri Rajendra,Accountant Member and C.N. Prasad,Judicial Member .ITA3669Mum2013, Assessment Years: 2008-09Case New Holland Construction JCIT (OSD) Equipment (India) Pvt. Ltd. Circle-2(2) (Formerly known as L&T Case Equipment Ltd.) Mumbai. Vs. B-1,207,Boomerang, Chandivali Farm Road, Near Chandivali Studio, Andheri(E), Mumbai-400 072. PAN:AAACL 4176 B .ITA7020Mum2011, Assessment Years: 2007-08 L&T Case Equipment Ltd. DCIT (OSD)(Now Case New Holland Circle-2(2) Vs.Construction Equipment (India) Pvt. Mumbai.Ltd.),Mumbai-400 072.PAN:AAACL 4176 B(Appellant)( Respondent)Revenue by : Shri K. Ravi Chandran - DR Assessee by : SShri Harsh Shah & Paras Savla -AR Date of Hearing : 14.09.2016 Date of Pronouncement: 21.09.2016 ,1961254(1)Order us.254(1)of Income-tax Act,1961(Act)PER RAJENDRA, AM- Challenging order of CIT(A)-5,Mumbai assessee had filed above mentioned appeal for two mentioned AY.s.As issue involved are common for both years we are adjudicating matter by passing single consolidated order for sake of convenience. 2.Assessee-company is engaged in business of manufacturing and sale of earth moving equipments.The details of dates of filing of returns, returned income, assessed income etc. can be summarised as under :- A.Y.ROI filed onReturned Assessment dt. Assessed Dt. of orders of Income(Rs.) Income(Rs.)CIT(A) 2007-08 29.10.200719,29,28,538- 24.11.2010 19,59,99,753- 21.07.2011 2008-09 24.09.200858,95,39,693- 05.12.2011 60,70,81,000- 22.02.2013 7020M11 (2007-08) : 13669M13-New Holland Construction Equipment (India) Pvt. Ltd. 3.Effective Ground of appeal is about disallowance of Rs.91.18 lakhs claimed on account of provision of warranty.During assessment proceedings,the AO found that assessee had debited Rs.91,18,120- under head provision for product warranty, that it had claimed that provision was made with regard to liability that had been quantified based on scientific and accepted method of valuation.By letter dt. 16.11.2011 assessee stated that provision was work -ed out based on warranty cost incurred in earlier years, that warranty was part of condition of sales, that it was legally bound for warranty claim and claim was made in conformity with AS-29. However, AO held that liability had not crystallized during year,that whatever be method for ascertaining liability it did not change nature of expenditure.He referred to case of Bharat Earth Movers and held that liability towards product warranty was not certainty in case under consideration,that it could not be said with any degree of certainty that free replacement would become necessary in case of any particular customers,that to equate product related warranty with liability arising in relation to employees was misplaced, that warranty provision was contingent in nature,that warranty provision was created on certain percentage to basic sales value, that it was debiting warranty expenses as and when incurred. Finally, he held that claim of assessee made under head warranty provision( Rs.91.18 lakhs)was not allowable. 4.Aggrieved by order of AO,the assessee preferred appeal before First Appellate Authority(FAA).Before him,it was argued that assessee was manufacturing earth moving equipments,that it would provide warranty to its customers as per terms and conditions of warranty,the warranty was given on sales of finished goods of customers, that it was integral part of sales price,that terms and conditions provided to customer were mentioned in operating manual of goods delivered to customers,that it would approve warranty cost upon sales,product warranty cost was based on 2 3669M13-New Holland Construction Equipment (India) Pvt. Ltd. calculation made by it keeping in view expenditure incurred on service warranty cost in past adjusted for current trend, actual claims passed during year were debited to warranty account, that for current year sales provision for warranty were based on percentage derived technically based on past trend, that it followed scientific method for making warranty which was continu - ously under review,that there was no ad hoc amount provided in books for warranty claimed, that for AY 2007-08 warranty provision was made at Rs.91. 18 lakhs as against total warranty expenses incurred Rs.1.15crores,that it already utilised entire warranty provision for 2007-08 in 2008-09, that it had incurred Rs.97.81 lakhs as warranty expenses upto 31.3.07on its sales pertaining to FY.2005-06,that said expenses were 0.59% of total sales of 2005-06, that based on past trend and corrective actions taken by it warranty was estimated @0.43% of sales for 2007-08 as compared to 0.59% for earlier year. After considering submission of assessee and assessment order,the FAA held that provision were not made on any scientific rational and were purely ad hoc in nature, that in order to claim deduction for expenditure what should be certain was incurrence of liability, that it failed to prove actual incurrence of liability under warranty clause, that in absence of any details of acceptance of claim made on percentage basis could not be allowed, that percentage was derived on estimation rather than scientific basis, that product sold by assessee would suffer from same type of defects. He placed reliance on case of Indian Molasses Co.(P) Ltd.(37ITR66) and held that it had created provision on adhoc basis, that estimation made by assessee was arbitrary that it was not entitled to any deduction. 5.Before us Authorised Representative (AR)stated that product warranty cost was based on estimate made by companykeeping in view expenditure incurred on service warranty cost in past, that similar expendi -3 3669M13-New Holland Construction Equipment (India) Pvt. Ltd. ture was allowed by AO in earlier and subsequent years while passing orders us. 143(3) of Act, that except for two AY.s AO had accepted method followed by it. He referred to case of Rotork Controls India P. Ltd.(314ITR62); Woodward Governor India Ltd. (321 ITR 147); Sony India P. Ltd.(160 taxman 397); Haden International Group India P.Ltd. (20 SOT 305) and Simpson & Co. Ltd. (10 ITR (Trib.) 283) and also referred to pg no. 25-26 of PB. Departmental Representative (DR) supported order of FAA and stated that assessee was not following any scientific method, that it was contingent liability.He relied upon case of Indian Molasses Co. (P) Ltd. (supra). 6.We have heard rival submissions and perused material before us. We find that assessee had made provisions for warranty for year under consi -deration,that in earlier years also it was making such provisions,that after finalisation of accounts in subsequent year necessary entries were made in books of accounts about warranty,that it was following said method and AO had accepted method in subsequent and earlier years while completing assessment us.143(3)of Act.Pages 25 and 26 give details of working of warranty i.e.provision for warranty and actual expenditure incurred by assessee for FY.s.2000-01to 2009-10.Thus,the assessee was following set method for last many years and had followed in subsequent years also.Except for one year actual expenditure was always more than provisions.Provision was based on total sales.In our opinion,it cannot be said that method adopted by assessee was not in accordance with historical trend. 6.1.We would like to refer to case of Rotork Controls India P.Ltd. (supra).In that matter Hon ble Apex Court has dealt identical issue.Facts of case were that assessee used to sell valve actuators. At time of sale it4 3669M13-New Holland Construction Equipment (India) Pvt. Ltd. provided standard warranty whereby in event of any actuator or part thereof becoming defective within 12 months from date of commissioning or 18 months from date of dispatch, whichever was earlier, it undertook to rectify or replace defective part free of charge. Right from AY.1983-84 claim for allowance of this warranty had been allowed. For AY. 1991- 92, it had made provision for warranty of Rs.10,18,800- at rate of 1.5 % of turnover.Since this provision exceeded actual expenditure, assessee reversed Rs. 5,00,246- as reversal of excess provision, and claimed deduction of net provision of Rs.5,18,554-.But,the AO disallowed claim on ground that it was merely contingent liability. High Court on appeal held that no obligation was cast on date of sale and consequently there was no accrued liability.Deciding appeal in favour of assessee,the Hon ble Apex Court held as under: valve actuators, manufactured by assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective ; that valve actuator being sophisticated item no customer was prepared to buy valve actuator without warranty. Therefore, warranty became integral part of sale price ; in other words, warranty stood attached to sale price of product. In this case warranty provisions had to be recognized because assessee had present obligation as result of past events resulting in outflow of resources and reliable estimate could be made of amount of obligation. Therefore, assessee had incurred liability during assessment year which was entitled to deduction under section 37 of Income-tax Act, 1961. present value of contingent liability, like warranty expense, if properly ascertained and discounted on accrual basis can be item of deduction under section 37 . principle of estimation of contingent liability is not normal rule. It would depend on nature of business, nature of sales, nature of product manufactured and sold and scientific method of accounting adopted by assessee. It would also depend upon historical trend and upon number of articles produced.53669M13-New Holland Construction Equipment (India) Pvt. Ltd. provision is liability which can be measured only by using substantial degree of estimation. provision is recognized when : (a) enterprise has present obligation as result of past event ; (b) it is probable that outflow of resources will be required to settle obligation, and (c) reliable estimate can be made of amount of obligation. If these conditions are not met, no provision can be recognized. principle is that if historical trend indicates that large number of sophisticated goods were being manufactured in past and facts show that defects existed in some of items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from gross receipts under section 37 . 6.2.In our opinion,the assessee had made right claim and AO.s.in earlier and subsequent years have rightly accepted it.Nothing has been brought on record to prove that orders us.147 or 154 or 263 were passed for earlier or subsequent years on account of allowing warranty expenditure.Thus,the department has accepted claim made by assessee and method adopted by it.It is true that principles of res judicata do not apply to income tax proceedings.But,it is also true that rule of consistency applies to such proceedings.It is said that consistency expected on part of Revenue in taxation matters is not unknown,but rather is expected so as to make assessee aware about taxable liability. If legal position is changed or there is cogent material available, Revenue can take different stand or make valid departure but at same time,in absence of any such circumstances, namely, any material leading to different conclusion or change in legal position,the consistency on part of Revenue should be adhered to.In case of Galileo Nederland BV,(367ITR319),the Hon ble Delhi High Court has held as under:.decision on issue or question though not binding, should be followed and not ignored unless there are good and sufficient reasons to take different view. Thus, it is possible for Assessing Officer to depart from finding or decision in one year as it is final and conclusive only in relation to particular year for which it is made but when fundamental aspect pervading through different assessment years has been found as fact in one way or other, it would 63669M13-New Holland Construction Equipment (India) Pvt. Ltd. inappropriate to allow position to be changed in subsequent year particularly when finding has been accepted. principle is also based upon rules of certainty and consistency that decision taken after due application of mind should be followed consistently as this leads to certainty, unless there are valid and good reasons for deviating and not accepting earlier decision. In matter of Aroni Commercials Ltd.(362 ITR 403)the Hon ble Bombay High Court has held that though principle of res judicata is not applicable to tax matters as each year is separate and distinct,nevertheless where facts are identical from year to year,there has to be uniformity and consistency in treatment. 6.3.We find that AO or FAA has not brought on record as to how facts of earlier years were different from facts of year under consideration or as to how legal position has changed.In short,there is nothing to prove that facts of case for year are different.So,there was no justification for disturbing method followed by assessee in earlier years.Reversing order of FAA,we decide effective ground of appeal in favour of assessee. ITA3669Mum2013 AY : 2008-09 : 7.As facts and circumstances for year under appeal are almost identical to facts of AY.2007-08,so,following order for that AY.,we decide effective ground in favour of assessee. As result,appeals filed by assessee for both AY.s. stand allowed. Order pronounced in open court on 21st September, 2016.21 2016 Sd- Sd-(C.N. Prasad )( Rajendra)JUDICIAL MEMBERACCOUNTANT MEMBER Mumbai;Dated : 21.09.2016. Jv.Sr.PS.Copy of Order forwarded to : 1.Appellant 2. Respondent7 3669M13-New Holland Construction Equipment (India) Pvt. Ltd. 3.The concerned CIT(A), 4.The concerned CIT 5.DRE Bench, ITAT, Mumbai , 6.Guard File True CopyBY ORDER,Dy.Asst. Registrar , ,ITAT, Mumbai.8 Case New Holland Construction Equipment (India) Pvt. Ltd. v. JCIT (OSD) Circle-2(2), Mumbai